September 8, 2005
Alternative Fee Arrangements for Law Firms
The billable hour is only a little more than 50 years old. Prior to 1950 law firms didn’t track their time and law firm bills were generally one-liners that read, “For professional services rendered." The billable hour arrived on the scene encouraged by consultants as a way to increase per partner income. Life was simpler and slower prior to 1950. Given similar matters, skill was about the only thing that influenced differences in accumulated time. That could be dealt with through different hourly rates, i.e., partners versus associates, for example. Time has changed. Technology and knowledge management now make dramatic differences in efficiency. Yet, the billable hour continues to be the dominate method of compensation to law firms.
Because of this site’s affiliation with Juris®, some are surprised when I post articles encouraging Alternative Billing Arrangements. Juris, Inc.’s mission is not to promote the billable hour. The company’s objective is to provide the law firm with the software and services that increase owner-partner income and wealth. Thus, the Juris systems accommodate alternative fee arrangements and provide capabilities to help the law firm understand the cost of providing its services by style of case or matter.
I am going to devote the next several postings to Alternative Billing. I prefer the term Alternative Fee Arrangement (AFA) because that is what is entailed. It is not just another way to bill. What AFA involves is coming to an agreement with the customer (your client) on an alternative way to compensate the law firm for value delivered.
Here is the rub. Most Alternative Billing methods discussed in the publications and articles within the law firm community do not make the AFA grade. They are generally defensive in nature and do not address 1) the real cause giving rise to the interest in AFA on the customer side or 2) the need for an alternative on the law firm side.
The customer (and we are talking about the business customer) is looking for predictability—lower cost is a smoke screen. The law firm needs a new fee arrangement that will let the law firm profit from technology deployed and for efficiency—working smarter, not harder. If we can pair the efficient law firm with the client under an alternative fee arrangement, both objectives can be achieved and it will lower cost while at the same time increasing per-partner income. One objective does not have to be achieved at the expense of the other.
Instead of addressing these two issues (predictability and higher partner income), law firms and clients are locked into a dance around the issues. Clients look for methods that lower their cost at the expense of firm partner income. Law firms look for methods that defensively appease clients and minimize the impact on earnings. Those approaches treat only the symptoms. They are Band-Aids® that do not directly address the objectives of either the client or law firm. What is needed is not yet on the map¾it is an alternative that increases “value” to the client and, at the same time, increases “profits” of the owner-partners of efficient law firms.
We will search for that missing alternative in the days ahead.
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Filed under Alternative Billing by Tom Collins